U.S. Tax Compliance for Foreign Students

For many years, people from around the world dreamed of coming to the United States and starting anew. With the progress of technology, and transportation costs drastically decreasing over the past decades, the doors have opened to those who wish to pursue the benefits of our diversified education system. Unfortunately, our domestic laws are very complex and quite often foreigners aren’t aware of their reporting and disclosure obligations within the U.S.

Many individuals are surprised that they can be subject to a foreign tax system while temporarily residing in the U.S. Many students don’t have a desire to stay in the U.S. once their education journey comes to an end and they simply want to return to their homeland or relocate. Yet others find opportunity in what the United States has to offer and they decide to stay upon completion of their degree.

Whether an individual decides stay or go elsewhere, they need to be aware of the rules one must abide to and the associated tax consequences. Many individuals are aware of, or have heard of, the phrase “worldwide taxation” and know that it is connected to U.S. taxation. However, it takes some digging into the Internal Revenue Code to figure out what it really means. The irony of being present in the U.S. is that it can be difficult to obtain a green card or become a U.S. citizen; however, within the United States tax system one does not have to have a green card or be a U.S. citizen to be subject to the same tax law as other American citizens.

The U.S. tax law system recognizes individuals as resident aliens for tax purposes if one meets either the physical presence test or the bona fide residence test. For the sake of this article, the underlying assumption is that one comes to the U.S. for educational purposes, therefore, the physical presence test applies. The physical presence test basically says that if a person is in the U.S. for more than 183 days during the year one is deemed to be a U.S. resident in the realm of U.S. tax system (it includes certain look back periods as well, and a condition that one is at least present in the current year for 31 days).

Many foreign students don’t work or at least don’t make any income while attending undergrad or graduate school. However, it’s not the income that the foreign students should be concerned about but the disclosure obligations about their foreign affairs and their impact on the U.S. tax system. There are specific tax disclosure forms that need to be completed in order to comply with U.S. laws.

One example is foreign students within the U.S. educational system who are children of wealthier individuals and whose parents deposit money into a foreign account and the funds are available in a U.S. bank account for the student’s withdrawal and everyday access will need to be aware of the proper forms to complete.

What this translates to is that even though one may not make any income within the U.S. and have nothing else here but the pursuit of a Bachelor or Master’s degree, one may still be subject to the U.S. tax laws which could result in heavy penalties if one is not aware and even criminal charges if intent is proven.

Fortunately, there are also certain exemptions available and in some cases penalties don’t apply. The Internal Revenue Service and the U.S. Department of Treasury created voluntary disclosure programs to get the foreigners who were unintentionally breaking the laws back on track and in compliance. It is important that foreign students talk with a tax U.S. representative regarding their situation.